Anadarko shares tumble after $14B judgment

HOUSTON – A federal bankruptcy judge’s ruling that Anadarko Petroleum Corp. may have to pay up to $14 billion in liabilities shocked Wall Street on Friday.

The Houston oil producer’s shares closed down 6.4 percent to $78.30 on Friday, the day after U.S. Bankruptcy Judge Allan Gropper found that Anadarko subsidiary Kerr-McGee had improperly transferred environmental liabilities to a chemical company it spun off in 2005.

Anadarko paid $18 billion to buy Kerr-McGee in 2006, less than a year after the Oklahoma oil and gas producer spun off its chemicals business into titanium producer Tronox Inc. Four years earlier, Anadarko had passed up on buying the firm because it had old environmental liabilities with “no end in sight for at least 30 more years,” according to court documents.

Stamford, Conn.-based Tronox sued Anadarko and its subsidiary and filed for bankruptcy in 2009, leading to years of court battles that involved testimony from nearly 30 witnesses. Gropper ruled Thursday that Anadarko and Kerr-McGee left Tronox insolvent and undercapitalized, and that the companies could be liable for $5.15 billion to $14.2 billion in damages.

U.S. officials said late Friday it would be the largest amount ever awarded in a bankruptcy case for federal environmental claims and liabilities, and it ranks among the largest environmental enforcement awards in U.S. history.

Investors, who had assumed Anadarko would be on the hook for about $3 billion, have erased nearly $4 billion from the company’s market capitalization since the news broke.

“Nobody expected any judge to throw the maximum penalty at the company, especially because Anadarko had nothing to do with” the spin off, said Fadel Gheit, an analyst at Oppenheimer & Co. “One would expect the judge would factor that in.”

Not over

It was not a final judgment. Anadarko has 30 days to argue its case further, which could shave off some of the amount it owes, and both parties can still appeal a final order. Before a final judgment is entered, Gropper said, the New York bankruptcy court must determine whether the U.S. bankruptcy code immunizes Anadarko from the liabilities, as the company has argued.

Wall Street analysts said Friday the market had only baked about $9 billion in potential liabilities into Anadarko’s stock price. The company “vehemently” disagrees with Gropper’s opinion and is exploring the appellate court route, Anadarko CEO Al Walker said in a written statement.

Anadarko told the U.S. Securities and Exchange Commission last year that it would stop holding financial reserves that would have served as a buffer against a large ruling. Still, the company could pay a large fine by selling assets, using cash flow or tapping into its $5 billion credit facility, said Andrew Coleman, an analyst at Raymond James.

The company could sell low cash-generating assets in Mozambique, Brazil and elsewhere for a combined $18 billion, leaving it with excess cash even in the face of a large judgment, analysts with Tudor Pickering Holt & Co. wrote Friday.

Financial risk

But the length of the appeals process, Coleman added, could play against Anadarko: If oil prices fall next year as many analysts expect, it could put a damper on the company’s cash flow and stir up investor speculation that Anadarko would be hard pressed to pay a large judgment. The company had about $3.9 billion in cash flow in the third quarter, according to regulatory filings.

“There’s still a tremendous amount of uncertainty,” Coleman said. “We don’t know if this will be resolved in 60 days or five years.”

Analysts with Stifel Nicolaus & Co. wrote the market likely has not yet factored in the “worst case scenario” the company’s stock price, which could sink to about $65 per share if the final judgment against the company is $14 billion.

“We believe the market was pricing in a $4 to $6 per share liability,” Goldman Sachs analysts wrote Friday, adding those numbers are now closer to $10 to $28 in pre-tax liabilities per share. Still, the $28 ceiling could help ease investors’ uncertainty about the case.

“Even with this worse than expected decision, the increased but not complete clarity provided by the court’s ruling could refocus investors again,” the Goldman Sachs analysts wrote.